Thoughts on Byd Co.'s Shenzhen Listing

by: Clemens Scholl

Byd Company (OTCPK:BYDDF) (OTCPK:BYDDY) announced last week that it plans to list on the Shenzhen market. The company announcement can be found here.

Until now, the Chinese car maker was only listed on the Hong Kong market, and very successfully so. It debuted on the Hong Kong market in July 2002. The following chart shows the stock price performance since its public listing, adjusted for all corporate actions. The stock went parabolic after Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) bought a nearly 10% stake in the company in September 2008. Berkshire subsidiary MidAmerican invested $230 million ($1.8bn HK), buying 225 million new H-shares at HK$8 per share. The share price increased tenfold in the following year, surpassing HK$80.

[Click all to enlarge]

stock price chart
Over the last year, the stock price roughly halved, and has continued its slide in 2011, deflating the strong price appreciation of 2009. The price action is not dissimilar (although the numbers are bigger) to the price action before the Berkshire investment. The stock price then also more than halved from its previous peak, from an (adjusted) high of over HK$20 to less than HK$10 (Berkshire paid HK$8).

Byd plans to issue 79 million new A-shares for its listing in Shenzhen. The company release contains selected financial data, but the company has announced it will issue a full Chinese prospectus for its Hong Kong listing. The Mainland IPO does not constitute a large increase in the number of shares, since the company currently has 2,275.1 million shares outstanding (793.1m H-shares and 1,482m unlisted domestic shares). The new issue would thus amount to about 3.35% of the enlarged share capital. But it represents an important step into tapping the domestic equity market. The 1,482m domestic shares currently issued are not listed, and held by the founder, other senior managers and employees.

They are distributed as follows among the top managers:

Number of shares

% of domestic shares

Mr. Wang Chuan-fu



Mr. Lu Xiang-yang



Mr. Xia Zuo-quan



Mr. Yang Long-zhong






The Shenzhen listing may enable some employees to cash in their stock in the company, if the listing permits such a thing (the domestic shares would have to be registered with the stock exchange first, I guess).

The last six years have been very successful for Byd. The following table contains the financial highlights of the years 2005-10, taken from the company website. Revenues have increased sevenfold, and operating profit nearly sixfold. Net profit increased from 503m RMB in 2005 to 2,523m RMB in 2010.

Byd earned 1.11 RMB per share in 2010, maintaining its gross profit margin in the 20% range, although the last year saw the lowest gross profit margin at 18%. Net profit also dropped from 3.8bn RMB in the previous year. The return on equity remained in the double digits at 14%.

The Byd stock is traded at multiples of book value; therefore, the comparison to the book value evolution is not that useful. However, as the following table from the company website shows, the increase in net assets per share has been very good. Equity at Byd has compounded at an annual growth rate of 34.5%, which is very impressive.

balance sheet data
The balance sheet also remains healthy, with roughly 1/3 equity and 2/3 debt, a ratio that has been stable over the years.

As per its filing, Byd intends to use the proceeds of its A-share issue in the following way:

  • RMB 400m will be applied on the production project on lithium-ion batteries of Byd Lithium Battery Co., Ltd. (the total investment amount of which is RMB 400m).
  • RMB 1,140,350,000 will be applied on the project on research, development and manufacturing base of automobile in Shenzhen (the total investment amount of which is RMB 4,331,000,000).
  • RMB 652,050,000 will be applied on the expansion project on automobile products and accessories of Byd Auto Co., Ltd. (the total investment amount of which is RMB 652,050,000).

The company is thus poised to invest in further growth. The company has not issued a price guidance for its IPO in Shenzhen, but based on the total sum of these investments (2,192.4m RMB) and the number of shares to be issued (79m), the price per share would be 27.75 RMB, which corresponds to 33.2 HKD, a premium to the current market price of the H-shares. The H-shares closed at HK$ 26.75 on Friday. It will be interesting to see whether the company can achieve this premium to the Hong Kong price. The company might even be able to attract a higher premium, as A-shares often trade at premium to H-shares, since the domestic shares are the only equity investments available to Chinese mainland buyers, and arbitrage is difficult or even impossible.

The H-shares currently trade at about 20 times last year’s earnings, which is rather high – but the company has many things going for it. An impressive financial track record, great managers (Charles Munger referred to Wang Chuan-fu as “a combination of Thomas Edison and Jack Welch”), good technology in the electric car and battery space, and a domestic market that is still far away from car ownership levels seen in the United States or other developed markets.

The trends in car ownership (when looking at that figure, keep in mind that the total number of cars in the US is about 250 million, and that the US has only 23% of China’s population) and the growth of the expressway system both bode well for Chinese car manufacturers as well as toll road operators in the PRC (see my recent article on the subject). Berkshire Hathaway’s investment is likely to be a long-term success (even if the market was a little too euphoric regarding Byd over the past two years), and the current price might be a good point to join the joyride. That’s at least my opinion, and I bought shares over the past weeks.

Disclosure: I am long BRK.B.

Additional disclosure: I own H-shares of Byd Co. Ltd.